The markets shook off a weak open and an uneventful Fed meeting
and rallied at the close to put a green candle at the end of a
string of red ones. While red and green are holiday colors many
traders are wishing for a little less lopsided mix.

Dow Chart - Daily

Nasdaq Chart - Daily

The day began with bad news on the economic front. Retail Sales
fell -2.3% last week according to the weekly chain store sales
report. Analysts were quick to blame the ice storm in the north
east but readers of the market monitor know the news has been
bad pretty much all over with only a few pockets of strength.
The weekly sales index fell to its low of the year at 393. The
Bank of Tokyo-Mitsubishi who produces these numbers said they
were lowering their estimates for the month of December to only
+2.5% growth from previous expectations of +5% growth. They
claim that while the current pace of sales is enough to maintain
growth there is no pent up demand and low confidence. They feel
that while the season is only going to be slightly weaker than
last year the risks have intensified that spending is going to
fall even further below current expectations. They warned that
retail profits are likely to suffer as a result.

Adding to the negativity from the Retail Sales report was the
Richmond Fed manufacturing survey. The headline number fell to
-1.0, a seven point drop with shipments and employment negative
but orders improved to +4 after three months in negative
territory. Prices continued to increase despite the drops
in order backlog, capacity utilization and employment. The
internal expectation components continue to reflect expectations
for an increase in business in the next six months. The
Wholesale Trade report showed a drop back to an inventory-to-
sales ratio of 1.22, which ties a record low. The -0.1% drop
was far below expectations of a +0.3% gain. This was the first
back to back monthly sales decline since 3Q-2001.

The Fed meeting did not help the investor sentiment before the
announcement. Investors "knew" the box the FOMC members spent
five hours wrapping today was going to be empty but they continued
to hold out hope that there was a surprise of some type inside.
At 2:15 the Fed presented their holiday gift and it was indeed
empty. The official statement continued the party line. "The
limited number of incoming economic indicators since the November
meeting, taken together, are not inconsistent with the economy
working its way through its current soft spot." The Fed was
referring to the negative ISM numbers and the higher than
expected unemployment. The markets dipped right after the
announcement as if traders had expected another surprise cut.
If so they needed serious psychological counseling. Volume
buyers showed up to buy the dip around 3:15 and the Dow
managed to close +100 for the day.

Most of the buying was in the big caps and appeared to be
cautious despite the gain. Something unusual happened today.
The 52-wk new lows beat the 52-wk new highs for the first time
Nov-20th 118 to 101. Why is this surprising? The last eight
trading days the markets have been dropping but the new highs
beat new lows every day. A stealth movement that suggested
underlying strength. Those new highs peaked on Dec-2nd with
202 stocks hitting the mark. New lows bottomed the prior day
at 37. Since then the trends have been closing and today they
crossed. Is it a one day wonder and if so why on a day that
the markets rebounded? We have to remember that the market
started the day weak and the Dow gained +72 points in the
last hour. Did the trend change at 3:PM? I would be surprised
if it did. We need to continue to watch these numbers as the
week progresses. With big caps getting the most attention and
internals weak it appears there is no conviction in today's
move. A continued increase in new lows tomorrow could be a
warning signal of further underlying weakness.

Much of the move was credited to a positive choice of William
Donaldson to head the SEC and replace Harvey Pitt. I would
not give this reason much credence even though institutions
were pleased with the appointment. A more likely reason for
the bounce was simply oversold conditions and strong support.
The Dow dipped to around 8475 three times in the first hour
of trading but sellers were not able to push it any farther
below 8500 than that level. The 8500 level begins about 150
points of strong support for the Dow. The 50DMA at 8365, 100
DMA 8388 and the 38% Fib retracement level at 8344. It is
going to be very difficult to break through this before the
holidays. This underlying support and the failure to break
even the beginning layer at 8500 on bad economic news was a
sign to institutions that buying stocks could be a safe move.
They used the 3:PM dip to trigger their buy programs and the
rest is history.

If you read between the lines above you probably picked up on
the "before the holidays" comment. I am becoming more concerned
about numerous declining internals and the eventual impact on
the broader market. I have been reporting on declining retail
sales for a couple weeks and the numbers today were no surprise.
Retailer profits are going to be tough to find in this post
holiday season. Tech stocks drew some attention with the Nasdaq
rebounding +23 points but that is hardly a blip compared to the
recent losses. Chip stocks managed only a minor rally on the
Taiwan Semiconductor news and positive comments from several
other techs. There is simply no normal end of year budget flush
that usually provides a 4Q lift to techs. WR Hambrecht reiterated
a sell rating on JNPR with a $4 price target due to smaller than
expected orders from large customers. This syndrome bodes ill
for the entire tech sector. Companies are holding on to the
extra budget cash, if any, instead of spending it.

Home builders, a staple in the current economy, took heat from
an article in the Wall Street Journal about donating money to
non-profit groups to be then given to home buyers as down
payments. This donation scam helps to eliminate excess home
inventory by selling to people who would not normally be able
to afford it. According to the report 17,000 Americans per
month have been buying homes with down payments from "gifting
groups" funded by homebuilders. It is feared now that these
buyers are an increased credit risk because they do not have
any of their own money at risk and a downturn in the economy
could create a massive wave of foreclosures. If home builders
are suddenly cut off from those 17,000 buyers per month then
the inventory backlog will ripple down through the food chain.
Prices will drop, layoffs will occur, suppliers will suffer,
etc. Locally in Denver 38% of sales by KB Homes were funded
with down payment gifts. If this program was to cease you can
see the potential problems. Even worse, the builders have
admitted raising the price of the homes to compensate for
the gift program. Lenders are afraid that the houses are
now over priced compared to normal houses bought in the
area. This makes the loans even higher risk for foreclosure
in any downturn because the loans exceed the value.

Need more evidence of weak economic internals? Wendy's hit a
52-week low and other food retailers are not far behind due
to lagging sales and shrinking profit margins. Even Lance,
the vending machine snack company, warned tonight that they
were cutting 4Q earnings estimates by about -10% due to
lower than expected 4Q sales. Think about this. They do not
rely on corporate budgets, IT spending and they are not
impacted by the IRAQ war or terrorists. This is spending at
the lowest level. Pocket change from consumers mostly in
office buildings or convenience stores. We are not talking
about slowing sales of $1,000 workstations but slowing sales
of 75 cent cheese and crackers. At least there will be plenty
of excess inventory available to send to the troops in Iraq.

Traders are also starting to be more concerned about the
IRAQ problem as well as new problems coming to light today.
The new high tech IRAQ war nerve center in Qatar, which is
staffed by hundreds of U.S. Central Command officers went
live today with a full test of command and control planned.
U.S. troops have taken over one quarter of Kuwait and are
conducting live fire exercises with tanks and planes this
week. Warships intercepted a North Korean freighter today
loaded with Scud missiles for Yemen. On Wednesday President
Bush is expected to unveil a new plan for global policing of
weapons of mass destruction. He is expected to make the case
for preemptive action against any nation that possesses or
supplies them to another. With North Korea the number one
supplier of weapons to smaller nations they are expected to
be high on the hit list. Let's see, IRAQ, Afganistan, Yemen,
North Korea, the number of battle zones is increasing daily.
If the announcement is broad enough we could add another
dozen countries to our list of potential targets. The markets
are not likely to react positively to any administration
announcement that sounds like "disarm now or we will disarm
you" when he is talking about countries who have nuclear
weapons like India and Pakistan.

The Dow bounced +100 points above support on weak volume from
very oversold conditions. Period. We need to be careful not to
read too much into this event. I think next year will be bullish
due to new tax breaks and economic stimulus finally taking
effect. However, we have to get past the next six weeks, which
will include more earnings warnings, a likely war declaration,
end of year tax selling, portfolio rebalancing, S&P and Nasdaq
rebalancing and a good possibility of a terrorist attack over
the holidays. Sounds like a wall of worry to me but nothing
the market can't conquer given time. Just don't expect the
rest of December to be full of long green candles. Buy the
red ones, sell the green ones!